Risk Parity Fails to Keep Pace With 60/40 Model

Wealth Management Editor

Jan 03, 2024

Reviewed by: etf.com Staff

Edited by: etf.com Staff

Where risk parity strategies went wrong is difficult to pinpoint, but wrong they have been for at least two years now.

Popularized by mega hedge fund shop Bridgewater Associates as something that could overtake the classic 60/40 model, risk parity investing concentrates on the amount of risk each asset class contributes to a portfolio instead of performance potential.

The idea sounds brilliant for a core holding until you start to appreciate the way investors employ these active strategies to sometimes measure past volatility, predicted volatility or a blend of the two.

Financial advisors and investors must often dig deep beneath the surface to understand what they’re getting into, which typically includes at least 40% weighting in bonds.

In the ETF space, only a few examples of risk parity exist, including the $671 million RPAR Risk Parity ETF (RPAR) and the $87 million UPAR Ultra Risk Parity ETF (UPAR).

The late-year stock market rally helped both those funds to finish 2023 with gains of just under 7%. But that less than a 60/40 proxy like the $2.2 billion iShares Core Growth Allocation ETF (AOR), which gained 16% last year.

And if the rebound of 2023 might seem like an unfair comparison with a strategy that focuses on risk, consider the data from 2022, which has been described as the worst year ever for the 60% stocks, 40% bonds model.

The high correlation across asset classes saw AOR finish 2022 down 16%, which compares to a 22.8% drop for RPAR.

Meanwhile, there is a risk parity mutual fund, AQR Multi-Asset I (AQRIX), that only dropped 10% in 2022, and gained 11.1% last year.

“I have looked at risk parity, and we modeled a few iterations, but I don’t like the return stream nor how they seem to feed on each other as a trend gains steam,” said Paul Schatz, president of Heritage Capital.

“The idea is sound, but it’s not so much on delivery,” he added.

This doesn’t mean there’s never a time or place for risk parity, which also goes by the names balanced beta and all-weather. But instead of touting it as the new 60/40 core, maybe this model would fit better in a smaller bucket designed for diversification.

Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter      

Jeff Benjamin

| Contact: [email protected]

Jeff Benjamin is the wealth management editor at etf.com, responsible for coverage related to the financial planning industry. This includes writing, hosting podcasts, webinars, video interviews and presenting at in-person events.

Jeff is a veteran journalist with more than 30 years’ experience covering the financial markets. He has won more than two dozen national and regional awards for his reporting. He most recently worked as a senior columnist at InvestmentNews where he wrote about investment products and strategies, as well as the broader financial planning industry. Prior to that, Jeff worked as an analyst at Cerulli Associates where he researched and wrote reports on the alternative investments industry. Jeff also worked as a money management reporter at Dow Jones Newswires, where he covered the mutual fund industry.

Based in North Carolina, Jeff is a former Marine and has a bachelor’s degree in journalism from Central Michigan University.

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